Feature: Mozambique drowning in debt

Mozambique's debt crisis leaves the country on the precipice of a financial disaster. But how did we get here?


Around a harbour in Maputo, Mozambique’s capital city, sit about a dozen very impressive white and blue fishing boats. But since the boats were delivered and positioned at the harbour towards the end of last year, not one has made a single voyage into Mozambique’s deep blue seas.

Instead, the boats have been left to rust and rot while the city’s business community and trendy young things peer at them from harbour-side restaurants. The reason is that the boats were never fit for purpose in the first place.

“$850m was borrowed to buy a fleet of tuna fishing boats so that Mozambique could export fish to the European Union (EU) and elsewhere, but the boats do not fulfil EU specifications,” says one NGO worker based in Maputo. Earlier this year, some of the boats – which were actually sold to Mozambique by a French shipyard – were taken to South Africa to be adapted.

“In Mozambique, we don’t even have the skills and expertise to run the boats in the first place. There isn’t one fishing captain in the country so we would have to employ foreigners to take the boats out. The boats are wasting away along the coast,” she says.

For those on the ground following the story, at the very least this was a huge waste of time and money. Mozambique is one of the fastest growing countries in sub-Saharan Africa, but the benefits are not trickling down to the people. According to data compiled by the UN, Mozambique ranked 180 out of 188 in 2015’s Human Development Index. Inequality is increasing, as shown by the rise in its Gini Coefficient, which hit 45.7 in 2013. Education, healthcare and infrastructure should be the focus of investment, not the fishing industry.

At the most, this is gross misconduct by the government. “$850m was taken out, but from what I can see there is only around $50m worth of assets as a result,” says a lawyer based in Maputo. “The rest of the money has ended up elsewhere. Now we know some of the cash went into buying patrol and surveillance boats, but that still doesn’t account for it all. I would presume some of the money has ended up offshore but this is just a guess.”

An attractive deal

Back in 2013, at the peak of Mozambique’s natural gas discoveries, Ematum, Mozambique’s new state-owned fishing company took a loan from Russia’s VTB and Swiss investment bank Credit Suisse. The $850m tuna bond, as it was aptly dubbed, had a coupon of 6.3% with payments amortising the principal twice a year and a maturity date of 2020. 

The loan would be used to buy boats to give a healthy boost to the country’s fishing industry. For investors the deal was a no-brainer. Lending cash to a developing economy boasting strong GPD growth and hoards of untapped natural resources due to come online in the next couple of years would be easy money. In 2013, Mozambique’s economy grew by 7.4% and economists believed it would remain strong.

The year 2013 represented Africa’s financial coming of age. Sovereigns and corporates across Africa tapped into global capital markets at yields they had never seen before. Cheap money continued to flood emerging markets on the back of Fed tapering and banks rushed to work on African debt deals. A government guarantee backing the tuna bond was the icing on the cake, lowering risk for those involved. But just two years after the debt was issued, Ematum chose to restructure the debt into a sovereign bond.

The boats docked at the harbour were not making any money and the promise of returns from Mozambique’s gas had not been realised. At the same time, GDP was slowing and the World Bank predicts that it will fall to 6.3% in 2016. Restructuring the debt would take some fiscal pressure off the government. 

“One major problem with the tuna bond was the structure,” says Bernardo Stoffel Aparicio, head of corporate and investment banking at Barclays in Mozambique. “It’s short-term and amortising so there would have been a lot of pressure in the next five to seven years in terms of repayments. Restructuring was a good option for the government,” he says.

Stuart Culverhouse, head of research at Exotix has a different take: “I think that Mozambique potentially had enough money to pay the interest on the tuna bond and didn’t need to restructure it, but there may have been domestic pressure to do so because the coupon and amortisation rate was high.”

He continues: “Mozambique has saved about $100m this year from restructuring the tuna bond into a sovereign bond saving $77m on the principal amortisation that was due in September and the $22m in interest. For 2017, for the full year, I believe Mozambique will save about $114m net: saving $190m on the tuna bond but paying $76m in interest on the new bond.”

While restructuring saved Mozambique essential cash in the short term, it also brought to light a labyrinth of debt undisclosed by the Mozambican government. Along with the $850m extended to Ematum, there was another $622m in loans to Proindicus, another state-owned company, and $535m to the Mozambique Asset Management Company (MAM).

Locally, people blame the previous president, Armando Emílio Guebuza and his then minister of defence Filipe Nyusi, the current president, for concealing the debt. “But we haven’t been able to prove this as yet,” says a student. “In any case, neither man is going to place the blame on the other.

 They were both in government when the debt was taken out and they are both part of the same political party [Frelimo].” Politically, there is too much to lose. “The Mozambican government took out the debt but bypassed parliament and the auditor general, which in theory is illegal,” says Mariam Umarji, managing partner at MB Consulting, a local consulting firm based in Maputo.

 “All other public companies that intend to take out debt need to go through the formal system of checks and balances operational in the country, but in this case it just didn’t happen,” she says. Some argue that because the debt was taken out illegally, there is no obligation for the government to pay it back. But default and debt forgiveness would be risky for Mozambique’s future forays into the international capital markets. Markets could punish the sovereign with painfully high yields in loans yet to be issued.

Instead, debt has started to pile up and a summary of Mozambique’s fiscal situation makes for a depressing read. In total, the amount of hidden debt is reported to be $1.4bn, with some analysts predicting more lurking under the surface. This discovery led to an exodus of the international donor community and the IMF, taking with them around $410m in donor funds. At the same time, Mozambique’s exports amount to around $3bn a year – less than half of the import bill of $7bn a year.

 The country’s budget deficit is 11.3% of GDP and rising and total debt is $11.6bn or 93% of GDP. Foreign direct investment has fallen by 74.4% since 2014 according to statistics from Mozambique’s Investment Promotion Centre (CPI).

Mozambique’s currency the metical has collapsed nearly 50% against the dollar since the middle of 2015 from around M45 to M77. By August, the annual inflation rate hit 22%. Mozambique is drowning in debt. As its fiscal situation continues to weaken, so does its ability to pay it off.

“You would think, seeing that Mozambique had a Standby Credit Facility (SCF) with the IMF [a tool providing financial assistance to low-income countries], banks extending loans to the country would have an obligation to disclose debt offered to SOEs with a government guarantee, but that wasn’t the case,” says the NGO worker.

“The IMF didn’t seem to pick up on anything at all. Perhaps it was because on the surface, Mozambique was doing well and the donor community didn’t want to ruffle any feathers,” she says. Could be light at the end of the tunnel?

After the debt discovery, Nyusi appointed ex-IMF official, Rogerio Lucas Zandamela as Central Bank governor as a gesture of good faith. Zandamela replaced Ernesto Gove, whose legacy is a brash and modern new Central Bank building in the middle of Maputo worth $500m. The offices are currently empty.

Following a visit to Washington DC and the IMF offices in September, Nyusi has agreed to a government audit in a bid to get the donor community back on side. The audit, however, will be conducted by Mozambique’s own attorney general.

“Nyusi was hugely reluctant to a forensic audit of Mozambique because, we assume, there are many more skeletons in the closet,” says one local banker. “But if we do get a deal with the IMF, this would be good for the country.

Just take a look at Ghana since the IMF got involved – investment has come back and the country is beginning to thrive again. Doing a deal with IMF sends the right signals to the international community. It will be our only way out,” he says.

But as one Mozambican dimly remembers: “Not so long ago we heard rumours that the attorney general ordered an audit of another company in Mozambique, and after the announcement, there was a huge fire and the building went up in flames. Ultimately, nothing was done in terms of the audit.

I doubt something this extreme will happen if the IMF is involved, and it is hearsay after all, but I don’t think the audit going to be smooth sailing either,” he says. Mozambique could avoid fiscal collapse if a government audit is enough to court the donor community back onto home soil. But on the ground damage has been done. Small to medium-sized enterprises are closing or desperately trying to restructure their own debt with local banks because they can’t access cash.

“Liquidity at one bank branch in Gauteng [a province in South Africa where Johannesburg is located] has more than the liquidity in all of Mozambique,” says the lawyer based in Maputo quoted above. “The local banking sector just doesn’t have the capacity to support the economy and lend – but this does mean that there is a lot of room to grow.”

While audited banking results are not out as yet, analysts and bankers alike predict that non-performing loan ratios in the banking sector are on the increase with local firms failing to meet repayment obligations. For holiday-makers, there are limits to the amount of foreign exchange they can access abroad: Standard Bank has limited cash withdrawals for Mozambicans offshore to $500 a month following restrictions on foreign exchange trading by the central bank.

“It’s as if we are being encouraged to keep our dollars offshore for safekeeping because you just can’t get anything out her in Mozambique,” says one local businessman. “And because some of us think that Guebuza has channeled cash offshore for one reason or another, why wouldn’t we do the same?” In an effort to curb inflation, the central bank has continuously raised benchmark interest rates.

In July, the base rate rose by 300 basis points to 17.25%. For locals, bank interest rates have risen to around 23%. “Last year I was planning on taking out a mortgage. Now I wouldn’t be able to make the repayments,” says a resident. “It’s the same for some many of us in the middle classes.”

Pressure among the people is building. With high-interest rates and high inflation, goods and services will increasingly become harder to afford. News reports are already pointing to high cement prices in the north of the country and if the price of petrol and bread begin creeping up, people might take to the streets in protest.

Mozambique was once a rising star but now those days are gone, as one lawyer at a Portuguese firm that has done business in Mozambique explains it. “Even if donors come back in and the debt situation becomes manageable, the pressure is already mounting. The middle classes can’t buy food and the poor are starving. Public opinion is very, very low,” he says.

Kanika Saigal

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